30 Mar 2020
Today, a decade after the start of austerity, we are paying the price for this ideological crusade. Our health systems are critically under-resourced and our public institutions are ill-equipped to meet the challenges we face.
Of course, it is welcome that governments are now loosening the purse strings to help individuals and businesses weather this crisis. Human lives should always come before economic dogma.
But we have to be careful not to fall into the trap of assuming central banks can solve all of our problems. As with any political intervention, it is essential to ask: cui bono?
A good place to start is to examine the impact of the coronavirus pandemic on the flow of money in the economy. As the economist and former trader and Gary Stevenson have described in detail, this exercise helps reveal who stands to gain from the current course of action.
Normally, the economy is driven by household spending. Some of that spending is on essentials like housing, utility bills, and food, while the rest is discretionary spending on things like entertainment, recreation, and travel. It is important to note that the wealthiest households spend proportionately much more on discretionary spending than the poorest households.
These expenses generate income for the companies, which in turn use a portion of these funds to pay the wages of their workers. In countries like the UK and the US, where capitalists and landlords have much more bargaining power as workers, most of the money workers earn ends up going to the homeowner class in the form of rents, mortgage payments and bills. Under normal circumstances, these revenue streams would fund lavish discretionary spending habits, and the cycle would continue.
How did the coronavirus impact this flow of money? While spending on essentials has been maintained, discretionary spending has collapsed. Restaurants, bars, theaters, cinemas and cafes have all closed, while domestic and international travel has stopped. This collapse in discretionary spending has resulted in a collapse in corporate income, which means that many companies can no longer afford to pay the wages of their workers.
It is worth considering what would happen here if governments did not step in one way or another. Landlords would soon discover that many of their tenants could not afford rent; banks would witness large scale defaults; and businesses would see their revenues and profits fall sharply. The owner class would suffer a serious economic blow.
That’s not to say workers wouldn’t suffer either: the shock would likely lead to large-scale layoffs, an unprecedented rise in unemployment and a dramatic increase in overall hardship. This is not a desirable outcome.
In order to prevent this from happening, governments and central banks have stepped in to close the income gap, and they are filling that gap with newly created money.
Who wins and who loses in this general classification? Even in countries with the most generous employee compensation plans, workers are only compensated for 80% of their salary. But most of that will be needed to pay for essential expenses, which means that overall, most workers will be worse off.
The flip side is that the property category’s income streams – rent, interest, and corporate income – are protected. But most importantly, because the discretionary spending of the rich has collapsed (they no longer go to good restaurants or spend money on vacations), they will now have a lot more money left each month. So while the bank balances of many assets will decline over the next few months, the bank balances of the affluent will increase dramatically. This is the key to understanding where all the new money that is pumped into the economy will end up. It’s not the gross income that matters, but the net income (i.e. how much money people have left after their essential expenses have been paid).
As Stevenson notes: “The government created new money to replace the lost spending of the rich, so that working people can continue to pay their bills to the rich. “
What is presented as a bailout for the workers is, in practice, a bailout for the rich. Who is going to pay for this? When the crisis eventually subsides, governments – now grappling with higher debts than at any time in peacetime history – will inevitably face calls to implement austerity to repay the debt burden. Once again, the burden will fall on ordinary people.
As Christine Berry writing: “The costs of the crisis are therefore still largely borne by workers and small businesses – although subsidized by the state, and therefore by future citizens – it is just that some of these costs are deferred. So far, no sacrifices have been demanded of banks, owners or profitable businesses. “
None of this should come as a surprise. After all, we live in an economic system that delivers uneven results by design. Injecting more money through this system will simply translate into more money for those who are already at the top.
What makes it different this time is the scale of the sums at stake. Governments are pumping unprecedented amounts of money into the economy, often for good reasons. But unless steps are taken to prevent it, it will simply be sucked up by the property class.
What can be done to prevent this? According to Stevenson and a growing number of economists, the most effective policy would be an emergency wealth tax. This would ensure that those with the broadest shoulders contribute to the resolution of the crisis and also provide a mechanism to recover any wealth accumulated through the government’s response to the crisis. Policies such as freeze rents, debt anniversaries and imposing strong terms on any corporate bailouts could also help to spread the burden more evenly.
Whatever the precise solution, the lesson is clear: injecting new money into the economy without altering power relations will only exacerbate existing inequalities. We made this mistake in 2008 – it is essential that we do not repeat it.